Suppose that in a year, an American worker can produce 100 shirts or 20 computers, while...

Output per Worker per year	U.S.	China
Shirts	100	100
Computers	20	10

Q1. (1pt) Which country has an absolute advantage in the production of each good?

	Country	Reason
Shirts
Computers

Q2. (2 pts)Calculate the opportunity cost of producing each good for both countries. For example, to fill out the blank at the top-left corner. Answer this question: ‘In America, how many computers should they give up to produce a shirt?’ Don’t forget the proper unit. Show your work.

Opportunity Cost	U.S.	China
Shirts
Computers

Q3. (1pt) According to your answers in Q2, which country has a comparative advantage in shirts? Computers?

	Country	Reason
Shirts
Computers

Q4. (2 pts) Now allow American and China to trade with each other. Suppose the terms of trade are 0.25 computers per shirt. What does this mean?

Questions	Answers
How many computers can be purchased with one shirt?
How many computers can be purchase with 100 shirts?
How many shirts can be purchased with one computer?
How many shirts can be purchase with 100 computers?

Q5. (3 pts) Suppose the U.S. and China produce the goods that they have comparative advantages and consider the trade with each other. With the ‘TOT is 0.25 computers per shirt’. Can trade occur? Are they willing to buy the good that they do not produce from the other country? Is this deal better off for both countries?

Q6. (5 pts) Now allow American and China to trade with each other. Find a mutually agreeable trade that makes each country better off than it was before it specialized. What is the range of TOT at which trade can occur?

Q7. (1 pt) List the determinants of the terms of trade. What do factors affect the level of the terms of trade?

Solutions

Expert Solution

Rahul Sunny answered 1 week ago

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